Ripple Labs Inc. and its wholly-owned subsidiary, XRP II LLC, formerly XRP Fund II LLC, entered into a non-prosecution agreement calling for a series of substantial remedial measures, including a migration of a portion of Ripple’s virtual currency business to a separate entity, the company’s ongoing cooperation in other investigations, an extensive remedial framework to ensure future compliance with federal laws and forfeiture and penalties totaling $700,000.
The agreement will resolve allegations that Ripple and its subsidiary failed to follow the law while engaging in the exchange of virtual currency and that the entities failed to establish and maintain an appropriate anti-money laundering program.
Ripple Labs Inc. is headquartered in San Francisco, California, and developed and sold virtual currency known as “XRP.”
Ripple Labs was represented by Grant Fondo of Goodwin Procter in Menlo Park, California and Matthew L. Schwartz of Boies Schiller in New York.
As of 2015, the currency of the Ripple network, XRP, is the second-largest digital currency by market capitalization.
The agreement formalizes the steps Ripple and its subsidiary must take to bring its virtual currency operation within the existing regulatory framework for money services businesses. The agreement consists of a settlement agreement, an agreed statement of facts, and a remedial framework for the company going forward.
Aside from monetary penalties in the form of forfeiture, the remedial framework requires the migration of any component of Ripple’s business that is engaged in the exchange of virtual currency into an entity registered with FinCEN.
The agreement calls for continued enhancements to the company’s anti-money laundering (AML) controls and training program.
The remedial framework calls for external audits through the year 2020, enhancements to the ripple protocol, increased transaction monitoring and an extensive review of historical activity.
The agreement is the culmination of a criminal investigation conducted by U.S. Attorney’s Office and the Internal Revenue Service’s Criminal Investigation Division. FinCEN joined the investigation with a parallel civil enforcement action.
In that action, Ripple Labs and XRP II have agreed to pay a $700,000 civil penalty, $450,000 of which will be designated a forfeiture to settle issues raised in the U.S. Attorney’s investigation.
Ripple described itself as an exchanger of virtual currency in a December 2013 filing made in San Francisco, California, federal court in an unrelated case.
As an exchanger, Ripple was required to register with FinCEN and to comply with applicable federal laws and regulations.
Yet Ripple sold XRP even though it had not registered with FinCEN, effectuating sales of over approximately $1.3 million in April 2013 alone. Ripple also failed to establish and maintain an appropriate AML program and failed to have policies, procedures and internal controls to ensure compliance with the Bank Secrecy Act and anti-money laundering laws. In July 2013, Ripple incorporated a subsidiary, now known as XRP II, that replaced Ripple as the seller of XRP.
Although XRP II registered with FinCEN, it failed to have an effective AML program or to file appropriate suspicious activity reports.
In late 2013, for example, it negotiated a $250,000 transaction with an individual who had prior felony convictions for dealing in explosive devices and had been sentenced to prison, failing to follow its own internal “know your customer” requirements.